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WHO TO CONTACT DURING THE LIVE EVENT
For Additional Registrations:
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Correcting Foreign Information Reporting
Noncompliance: Voluntary Disclosure Programs
TUESDAY, APRIL 30, 2019, 1:00-2:50 pm Eastern
FOR LIVE PROGRAM ONLY
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FOR LIVE PROGRAM ONLY
TUESDAY, APRIL 30, 2019
Correcting Foreign Information Reporting Noncompliance: Voluntary Disclosure Programs
Joshua Ashman, CPA, Partner
Expat Tax Professionals, New York
jashman@expattaxprofessionals.com
Nathan Mintz, Tax Counsel
Expat Tax Professionals, New York
nmintz@expattaxprofessionals.com
Notice
ANY TAX ADVICE IN THIS COMMUNICATION IS NOT INTENDED OR WRITTEN BY
THE SPEAKERS’ FIRMS TO BE USED, AND CANNOT BE USED, BY A CLIENT OR ANY
OTHER PERSON OR ENTITY FOR THE PURPOSE OF (i) AVOIDING PENALTIES THAT
MAY BE IMPOSED ON ANY TAXPAYER OR (ii) PROMOTING, MARKETING OR
RECOMMENDING TO ANOTHER PARTY ANY MATTERS ADDRESSED HEREIN.
You (and your employees, representatives, or agents) may disclose to any and all persons,
without limitation, the tax treatment or tax structure, or both, of any transaction
described in the associated materials we provide to you, including, but not limited to,
any tax opinions, memoranda, or other tax analyses contained in those materials.
The information contained herein is of a general nature and based on authorities that are
subject to change. Applicability of the information to specific situations should be
determined through consultation with your tax adviser.
Correcting Foreign Information
Reporting Noncompliance
Joshua Ashman, CPA
(718) 887-9933 (ext. 102) • jashman@expattaxprofessionals.com
Nathan Mintz, Esq.
(718) 887-9933 (ext. 116) • nmintz@expattaxprofessionals.com
I. Foreign Information
Noncompliance – An Introduction
Outline
❑ Introduction
❑ International Information Reporting
Slide 7
Introduction
U.S. System of Citizenship Taxation and Its Implications
As a basic rule, U.S. citizens and green card holders, even those residing outside
the United States, are considered to be U.S. residents for tax purposes and are
therefore subject to U.S. tax reporting on their worldwide income.
There are over 9 million U.S. citizens believed to be residing outside of the United
States.
Over the past several years, disclosure laws have been strengthened (e.g.,
FATCA) and international agreements have been expanded (e.g., IGAs) to
increase global tax transparency of U.S. taxpayers with foreign concerns.
Taxpayers at risk range from the “willfully delinquent” American to the
“accidental” American.
Slide 8
Introduction (cont.)
U.S. Government’s Two-Pronged Approach (“Good Cop, Bad Cop”) To
Encourage Disclosure:
(1) Increased Reporting Requirements:
• Reporting of Foreign Accounts (FBAR)
• Reporting of Foreign Financial Interests (FATCA)
• More Detailed Reporting of Foreign Entities
• Increased Penalties for Violations that Touch Foreign Activities
(2) Increased Amnesty Opportunities (2014)
• More Amnesty Options
• More Lenient Entrance Requirements
Slide 9
Introduction (cont.)
Increased Efforts and Global Tax Reach of the IRS
Cooperation with foreign governments and financial institutions
• FATCA / IGAs with dozens of countries
• Foreign banks requiring US citizens to sign W-9 or similar forms
• Justice Department Swiss Bank program
Cooperation with other governmental departments
• Treasury Department giving FBAR information to the IRS
• IRS giving delinquency information to the State Department to enforce
passport revocation penalty
Slide 10
Introduction (cont.)
Audit Focus on international returns
Audit Chances Increase
• 2017 Audit Percentage: 0.5% - overall / 5.2% - international returns
International Compliance Issues Added to IRS Audit Campaigns (2018)
• Individual Foreign Tax Credit
• FATCA Filing (Form 8938) Compliance
• Foreign Company (Form 1120-F) Compliance
• Foreign Trust (Form 3520) Compliance
• Tax Withholding (Form 1042) Compliance
• Transition Tax (New IRC Section 965) Compliance
• Exemptions, Deductions, and Credits Claimed by Nonresident Aliens
Slide 12
International Information Reporting – Examples of Forms
FBAR: Any U.S. account holder (person or entity) with a financial interest in or signature authority
over one or more foreign financial accounts, with more than $10,000 in aggregate value in a
calendar year, must file the FBAR annually with the Treasury Department.
Form 5471: annual information return of U.S. persons with respect to certain foreign corporations
New Forms 8992/8993: Calculation of Global Intangible Low-Taxed Income (GILTI) and Deduction
Form 3520: annual information return to report transactions with foreign trusts (including certain
foreign pensions) and receipt of certain foreign gifts
Form 8938: FATCA Reporting - Statement of specified foreign financial assets
Form 8621: filed by certain shareholders of passive foreign investment companies (“PFICs”) (such
as foreign mutual funds)
Form 8865: filed for each controlled foreign partnership when taxpayer is a 10% or more partner
Form 8858: filed for each wholly owned foreign entity for which a "check the box" election (i.e., an
entity classification election) has been made
Slide 13
International Information Reporting – Delinquency
U.S. filing tax delinquency can manifest in a number of ways. Delinquency can
result from any the following:
• Tax return is filed late
• Omitted or late filed information returns (e.g., FBAR, Form 5471, Form
3520)
• Returns are incorrect or incomplete – most common is the failure to report
worldwide income
In our most recent experience, we have seen a particular focus by the IRS on
late-filed Forms 3520-A, the deadline of which is a month earlier than the
general return filing deadline of April 15. Several clients have received penalty
letters from the IRS.
Slide 14
International Information Reporting – Examples of Penalties
• Failure to file penalty – 5% of the taxes owed for each month outstanding (capped at 25% of the
total tax liability).
• Failure to pay penalty – 0.5% of the taxes due for each month outstanding (no cap).
• Accuracy-related penalty – depending on the particular facts, an additional 20% penalty may
apply if your income is substantially understated or if your underpayment was due to negligence
or disregard of rules or regulations.
• Form 5471/8865/8858 Civil Penalties – $10,000 penalty per year per entity (up to $50,000 if the
delinquency continues after IRS notice).
• Form 5472 Civil Penalty – Increased to $25,000
• Form 3520 Civil Penalties – Penalty is equal to the greater of $10,000, or 35% of the gross
value of any property transferred to or distributed from a foreign trust, or 5% of the gross value of
the portion of the trust's assets (penalties increase if the delinquency continues after IRS notice).
• Criminal Penalties – A willful violation can result in the imposition of criminal penalties, including
imprisonment for up to 10 years and a fine of up to $500,000.
Penalty Abatement
The IRS may grant penalty abatement of some of the above civil penalties in the case of:
• A first time violation
• Reasonable cause explanation
Slide 15
International Information Reporting – Examples of Penalties
(cont.)
Examples of FBAR delinquency penalties include the following:
FBAR Civil Penalties – “Non-willful” delinquency can result in a penalty of $10,000 per account per
year unless there is “reasonable cause” for failing to file. A “willful” failure to file could be subject to
civil penalties equal to the greater of $100,000 or 50% of the balance in each unreported account.
(We will further discuss the concepts of “reasonable cause” and “willful versus non-willful” delinquency
in later slides on the disclosure amnesty programs).
FBAR Criminal Penalties – A willful violation can result in fines of up to $250,000 in fines and 5 years
of jail time.
The IRS has issued interim guidance to examiners for implementing procedures to improve the
administration of the FBAR. In it, examiners are advised that it may be appropriate to apply one penalty
for each open year, regardless of the number of unreported foreign financial accounts. In such case,
the penalty for each year would be limited to $10,000. For even less egregious cases, the facts may
indicate that asserting non-willful penalties for each year of delinquency may not be appropriate. In
such case, the examiner may assert a single penalty for all years of delinquent FBARs, which is not to
exceed $10,000.
II. Streamlined Disclosure Program
Outline
❑ Introduction
❑ Determining Residency
❑ Domestic and Foreign Offshore Procedures
❑ Non-Willful Standard
❑ Non-Willful Certification
❑ Challenges and Future of Streamlined Program
Slide 17
Introduction
The IRS Streamlined Procedures were first introduced as an amnesty program for
individuals in 2012 with strict entrance requirements. The Streamlined Procedures were
significantly modified in 2014 to have more lenient requirements. Among other things, the
revised 2014 program eliminated a requirement under the 2012 program that the
taxpayer have $1,500 or less of unpaid tax per year.
Effective July 1, 2014, the IRS began to offer two types of Streamlined Procedures:
(1) Streamlined Foreign Offshore Procedures (“SFOP”)
- For U.S. taxpayers residing outside the United States
(2) Streamlined Domestic Offshore Procedures (“SDOP”)
- For U.S. taxpayers residing within the United States
According to the latest IRS announcement on the amnesty programs, about 65,000
taxpayers have thus far participated in the program.
Slide 18
Determining Residency for Streamlined Programs
Taxpayers who are U.S. citizens or lawful permanent residents (e.g., Green Card
Holders) are considered to reside outside the United States if:
For at least one of the three Streamline years, the individual:
(1) did not have a U.S. “abode” (generally, one’s home, habitation, residence, domicile,
or place of dwelling); and
(2) was physically outside the United States for at least 330 full days (meaning, the
taxpayer did not spend more than 35 days in the United States).
Slide 19
Determining Residency for Streamlined Programs (cont.)
Taxpayers who are not U.S. citizens or lawful permanent residents are considered
to reside outside the United States if:
In any one or more of the last three years for which the U.S. tax return due date (or
properly extended due date) has passed, the taxpayer did not meet the “substantial
presence” test.
Under the substantial presence test, one must be physically present in the United States
on at least: (a) 31 days during the current calendar year; and (b) a total of 183 days
during the current year and the 2 preceding years, counting all the days of physical
presence in the current year, but only one-third the number of days of presence in the
first preceding year, and only one-sixth the number of days in the second preceding year.
Slide 20
Determining Residency for Streamlined Programs (cont.)
Case Study - Residency:
Facts:
The most recent 3 years for which the taxpayer’s U.S. tax return due dates have passed are 2015,
2016, and 2017.
Taxpayer is not a U.S. citizen or green card holder. Taxpayer was born in the UK and resided in the
UK until March 15, 2016, when she was transferred by her employer to its U.S. office. Taxpayer
was physically present in the U.S. for more than 183 days in both 2016 and 2017. While Taxpayer
did meet the substantial presence test for 2016 and 2017, she did not meet it for 2015.
Outcome:
Taxpayer meets the non-residency requirement for purposes of the Streamlined Foreign Offshore
Procedures.
Slide 21
Streamlined Foreign Offshore Procedures
Under the Streamlined Foreign Offshore Procedures (taxpayers residing outside the
United States), the taxpayer is required to submit:
• 3 years of tax returns and information returns
• 6 years of FBARs
• Non-willful certification (US Resident - Form 14653, Non-US - Form 14654)
Note: A taxpayer cannot participate if the IRS has already initiated a civil examination.
Under this program, the taxpayer avoids all of the penalties normally associated with
delinquency (e.g., failure-to-file and failure-to-pay penalties, accuracy-related penalty,
information return penalties, FBAR penalties).
The participant is required to pay only the following:
• Unpaid taxes
• Interest
Slide 22
Streamlined Domestic Offshore Procedures
The Domestic Offshore Procedures (for taxpayers residing in the United States) have the
same submission requirements as the Foreign Offshore Procedures, namely 3 tax
returns, 6 FBARS, and the non-willful certification.
The Domestic Offshore Procedures differ from the Foreign Offshore Procedures in two
main ways:
(1) A domestic resident taxpayer that has failed to file a U.S. income tax return in any of
the three most recent tax years cannot participate in the domestic offshore
procedures (while a foreign resident taxpayer that has been similarly delinquent can
participate in the foreign offshore procedures).
(2) Further, even if the taxpayers qualifies, the domestic offshore procedures bear a 5%
miscellaneous penalty on the highest aggregate balance/value of one’s foreign
financial assets during the FBAR period (while the foreign offshore procedures have
no such penalty).
Slide 23
Non-Willful Standard
The language of the certification forms seems to offer a broader range of conduct that will
be considered non-willful for purposes of the Streamlined program.
In the form, the taxpayer must certify the following:
“My failure to report all income, pay all tax, and submit all required information returns,
including FBARs, was due to non-willful conduct. I understand that non-willful conduct is
conduct that is due to negligence, inadvertence, or mistake or conduct that is the
result of a good faith misunderstanding of the requirements of the law.”
Further insight into the willful standard can be gleaned from the FBAR penalty regime,
which we will discuss later in the FBAR amnesty program.
Slide 24
Non-Willful Standard (cont.)
Examples of Facts Evidencing Non-Willfulness
• Taxpayer always lived abroad (e.g., “accidental American”) or at least lived abroad as
adult or during years of employment
• Taxpayer living abroad has diligently filed and paid taxes in foreign country
• Taxpayer has a close connection to the foreign country (family, employment, etc.)
• Taxpayer has no post-secondary school education, and either no degree or an
undergraduate degree in the arts or sciences and not one in taxation or finance
• Taxpayer works in a non-skilled job
• Taxpayer inherited the account from a parent who lives in the foreign country
• The funds in the account originated offshore
• Taxpayer has limited income and owes no tax or little tax
• The person is not a sophisticated investor whose investments consist solely of an
employer 401(k) and IRA
Slide 25
Non-Willful Standard (cont.)
Examples of Facts Evidencing Non-Willfulness (cont.)
• Taxpayer living abroad has bank accounts only in his or her country of residence
• Taxpayer has during the filing period suffered severe emotional, medical, family or
business hardships
• The person’s tax return preparer was a store-front operator who did not inquire about
offshore bank accounts or provide a tax organizer to clients
• Taxpayer lives in rural area with limited access to accountants or US tax assistance
• For US resident, the person has recently immigrated to the U.S. and has been
preoccupied with adapting to the new country, culture, lifestyle, language or a new
spouse
• For US resident, the person recently immigrated to the U.S came from a country that
does not tax its citizens on world-wide income
Slide 26
Non-Willful Certification
Prior to 2016, the Certification form required that taxpayers include a general narrative of facts which lead
to the failure to timely report all income, pay all tax, and submit all required information returns, including
FBARs. In January of 2016, the form was significantly revised to require that the taxpayer’s explanation of
non-willfulness include the following:
• Specific reasons for your past failure, whether favorable or unfavorable to you, including your
personal background, financial background, and anything else you believe is relevant to your failure.
• An explanation as to the source of funds in all of your foreign financial accounts/assets. For example,
explain whether you inherited the account/asset, whether you opened it while residing in a foreign
country, or whether you had a business reason to open or use it.
• An explanation of your contacts with the account/asset including withdrawals, deposits, and
investment/ management decisions.
• A complete story about your foreign financial account/asset.
• If you relied on a professional advisor, provide the name, address, and telephone number of the
advisor and a summary of the advice (this requirement was previously included).
• If married taxpayers submitting a joint certification have different reasons, provide the individual
reasons for each spouse separately in the statement of facts (this requirement was also previously
included).
Slide 27
IRS Evaluation of Streamlined Submission
The IRS does not send successful applicants an acceptance or closing letter. In this sense,
“no news is good news.”
If the IRS does not receive adequate information in the Streamlined submission, it will often
follow up with the taxpayer and ask for that information. It may ask for:
• More detailed account information
• More detailed foreign entity information
• More information about the professional whose advice you relied upon
• A further explanation to support your claim of non-willful conduct
The IRS will also compare the information given in the Certification form to the tax returns
and FBARs filed. It now also has the ability to compare the information you provide to
account data received from foreign financial institutions under the FATCA regime.
Slide 28
Streamlined Program Challenges
• Entities (corporations, partnerships, trusts) are not allowed to participate.
• If the IRS receives or discovers evidence of willfulness or criminal conduct on the part of
the taxpayer (e.g., information received from foreign governments or financial
institutions), the IRS could open an examination or investigation that could lead to civil
fraud penalties, FBAR penalties, information return penalties, or even a referral to
Criminal Investigation. Entrance to the Streamlined program does not guarantee
immunity from criminal prosecution.
• Tax years outside years covered in the Streamlined submission are open to examination
and audit by the IRS.
Slide 29
Future of Voluntary Disclosure Programs
Recent IRS Announcement:
“A separate program, the Streamlined Filing Compliance Procedures,
for taxpayers who might not have been aware of their filing
obligations, has helped about 65,000 additional taxpayers come into
compliance.
The Streamlined Filing Compliance Procedures will remain in place
and available to eligible taxpayers. As with OVDP, the IRS has said it
may end the Streamlined Filing Compliance Procedures at some
point.”
III. New Voluntary Disclosure
Program
Outline
❑ Introduction
❑ Requirements and Penalty Structure
Slide 32
Introduction
The long-standing tax amnesty program for willful non-compliance, the Offshore
Voluntary Disclosure Program (“OVDP”), was officially closed on Sept. 28, 2018.
The popularity of the OVDP had decreased significantly in recent years. It peaked
in 2011, when about 18,000 participated, but then steadily declined through the
years, falling to only 600 disclosures in 2017.
In its place, the IRS opened a new Voluntary Disclosure Program (“VDP”), which
is available for taxpayers to make either domestic or offshore voluntary disclosures.
The new program replicates the OVDP in certain ways, but also has significant
differences. Details of the program are set out in a memorandum that was
published by the IRS in November of 2018.
The memorandum can be found here: https://www.irs.gov/pub/spder/lbi-09-1118-
014.pdf
The IRS has not yet published additional guidance on the program.
Slide 33
Requirements and Penalty Structure
Requirements
In general, voluntary disclosures under the program include a six-year disclosure period
(a longer period can be negotiated if advantageous to the taxpayer). Taxpayers must
submit all required returns and FBARs for the disclosure period.
Penalty Structure
i. The civil penalty under I.R.C. § 6663 for fraud or the civil penalty under I.R.C. §
6651(f) for the fraudulent failure to file income tax returns (together, the “civil fraud
penalty”) will apply to the one tax year with the highest tax liability. This penalty can be
as high as 75 percent of the underpayment of tax.
ii. In limited circumstances, examiners may apply the civil fraud penalty to more than
one year in the six-year scope (up to all six years) based on the facts and
circumstances of the case, for example, if there is no agreement as to the tax liability.
iii. Examiners may apply the civil fraud penalty beyond six years if the taxpayer fails to
cooperate and resolve the examination by agreement.
Slide 34
Requirements and Penalty Structure (cont.)
Penalty Structure (cont.)
iv. Willful FBAR penalties will be asserted (for each year) in accordance with existing IRS
penalty guidelines (i.e., greater of $100,000 or 50% of account balances).
v. A taxpayer is not precluded from requesting the imposition of accuracy related penalties
under I.R.C. § 6662 instead of civil fraud penalties, or non-willful FBAR penalties instead of
willful penalties. Given the objective of the voluntary disclosure practice, granting requests
for the imposition of lesser penalties is expected to be exceptional. Where the facts and the
law support the assertion of a civil fraud or willful FBAR penalty, a taxpayer must present
convincing evidence to justify why the civil fraud penalty should not be imposed.
vi. Penalties for the failure to file information returns will not be automatically imposed.
Examiner discretion will take into account the application of other penalties (such as civil
fraud penalty and willful FBAR penalty) and resolve the examination by agreement.
vii. Penalties relating to excise taxes, employment taxes, estate and gift tax, etc. will be
handled based upon the facts and circumstances with examiners coordinating with
appropriate subject matter experts.
viii. Taxpayers retain the right to request an appeal with the Office of Appeals.
IV. Delinquent Information Return
Programs
Outline
❑ Introduction
❑ Delinquent International Information Return Submission Procedures
(“DIIRSP”)
❑ Delinquent FBAR Submission Procedures (“DFSP”)
Slide 36
Introduction
The delinquent information return programs offer two alternatives to the main tax
amnesty programs. These two alternatives are:
(1) Delinquent International Information Return Submission Procedures
(2) Delinquent FBAR Submission Procedures
In general, these are penalty-free disclosure solutions for taxpayers who are only
delinquent with respect to international forms or FBARS and therefore do not
need a comprehensive program.
Slide 37
(1) Delinquent International Information Return Submission
Procedures (“DIIRSP”)
U.S. taxpayers with foreign concerns may be required to attach certain
international information forms to their federal income tax returns.
Such forms include, for instance:
Form 5471 – ownership interest in a foreign corporation
Form 8865 – ownership interest in a foreign partnership
Form 8858 – ownership in interest in a foreign disregarded entity
Form 3520 – dealings with a foreign trust and the receipt of large gifts from
nonresidents
Slide 38
DIIRSP Requirements
The DIIRSP are available to those who do not need to use the OVDP or
Streamlined Procedures to file delinquent or amended tax returns to report and
pay additional tax, but who:
• have not filed one or more required international information returns
• are not under a civil examination or a criminal investigation by the IRS
• have not already been contacted by the IRS about the delinquent
information returns
• have “reasonable cause” for not timely filing the information returns
The taxpayer must file the delinquent information returns with a statement of all
facts establishing reasonable cause for the failure to file. Assuming the
taxpayer meets these criteria, the IRS will not impose a penalty for failure to file
the delinquent information returns.
Slide 39
What constitutes “reasonable cause”?
IRS FAQ:
“The longstanding authorities regarding what constitutes reasonable cause
continue to apply, and existing procedures concerning establishing
reasonable cause, including requirements to provide a statement of facts
made under the penalties of perjury, continue to apply. See, for example,
Treas. Reg. § 1.6038-2(k)(3), Treas. Reg. § 1.6038A-4(b), and Treas. Reg. §
301.6679-1(a)(3)”
IRS Internal Revenue Manual 20.1.9.1.1(4)
“…taxpayers who conduct business or transactions offshore or in foreign
countries have a responsibility to exercise ordinary business care and
prudence in determining their filing obligations and other requirements. It is
not reasonable or prudent for taxpayers to have no knowledge of, or to solely
rely on others for, the tax treatment of international transactions.”
Slide 40
What constitutes “reasonable cause”? (cont.)
Court Decisions
Congdon v. U.S. [108 AFTR 2d 2011-6343 (E.D. Texas 2011)]
Taxpayer held a partnership that formed offshore entities for clients. The partnership owned
a controlled foreign corporation (CFC). Taxpayer filed Form 5471 and did report the income
from the CFC on the Form 1040, but he did not report the income on the Form 5471. The
IRS imposed a $10,000 penalty for filing a substantially incomplete Form 5471.
Taxpayer argued reasonable cause, arguing that he was not a tax expert and he
misunderstood the instructions for Form 5471. The government argued that neither
ignorance of the law nor complexity of the tax laws constituted reasonable cause.
The Court held for the Taxpayer, concluding that although ignorance of the law alone is not
sufficient to constitute reasonable cause, inexperience in tax matters, the complexity of the
law, and a good record of compliance can show reasonable cause.
See also Nance v Commissioner [111 AFTR 2d 2013-1616 (W.D. Tenn. 2013)].
The court ruled that if Taxpayer could show that his accountant had advised him that he did
not need to file Form 3520 and that he reasonably relied on that advice, he would have
reasonable cause.
Slide 41
(2) Delinquent FBAR Submission Procedures (“DFSP”)
The Bank Secrecy Act (BSA) gives the Department of Treasury the authority to
collect information from United States persons, including expats, who have
financial interests in or signature authority over financial accounts maintained
with financial institutions located outside of the United States.
The BSA requires that a FinCEN Report 114, Report of Foreign Bank and
Financial Accounts (FBAR), be filed if the maximum values of the foreign
financial accounts exceed $10,000 in the aggregate at any time during the
calendar year.
Slide 42
FBAR Penalties
Examples of FBAR delinquency penalties include the following:
FBAR Civil Penalties
Negligent or “non-willful” delinquency can result in a penalty of $10,000 per
account per year unless there is reasonable cause for failing to file.
A “willful” failure to file could be subject to civil penalties equal to the greater of
$100,000 or 50% of the balance in each unreported account.
FBAR Criminal Penalties
A willful violation can result in fines of up to $250,000 and 5 years of jail time.
Note: Monetary penalties are subject to inflation.
Slide 43
Willful versus Non-Willful in the FBAR Penalty Context
Courts’ Approach
Consistent with the Supreme Court’s interpretation of the word “willful” in the civil
context, courts in recent years have consistently held that the standard for
“willfulness” for civil FBAR violations includes recklessness and willful blindness.
Theses courts rejected the stricter “intentional violation” threshold used in the criminal
context.
As is the case with the standard for willfulness, the courts have been uniform with
regard to the burden of proof for civil FBAR penalties; the government bears the
burden of proving liability for the civil FBAR penalty by a preponderance of the
evidence (the event was more likely than not to have occurred).
Case Citations
U.S. v. Garrity, 2018 U.S. Dist. LEXIS 56888 (D. Conn. 2018)
Bedrosian v. US, 2017 U.S. Dist. LEXIS 56535 (ED PA 2017))
US v. August Bohanec et ux, USDC CD Ca., No. 2:15-cv-04347 (December 2016))
Slide 44
Willful versus Non-Willful in the FBAR Penalty Context
The Horowitz Case – 2019
(2019 U.S. Dist. LEXIS 9484 (D. Md. 2019))
Peter and Susan Horowitz maintained a Swiss account with a balance of almost $2 million.
The account was originally opened when the taxpayers lived abroad in Saudi Arabia, but
they kept the account open when they moved back to the US. The Horowitzes did not
disclose the account to their U.S. tax preparer. They signed their tax returns each year
answering “No” to the 1040, Schedule B, question about whether they had money in an
account overseas or filed the FBAR to disclose the foreign account.
In 2010, they finally disclosed the account as part of entering the OVDP tax amnesty
program, but they opted out of the program some time afterwards. In 2014, the IRS
assessed penalties of $247,030 against each of them for the 2007 and 2008 tax years.
The Horowitzes appealed the proposed enhanced FBAR penalties, and the Appeals officer
actually partially sided with them and requested that the IRS Appeals FBAR coordinator
remove and reverse the FBAR penalties as prematurely assessed. The IRS then sued to
collect the enhanced penalties.
The Court held, among other things, that the willfulness penalty should apply with respect
to both Peter and Susan for 2007 and with respect to Peter only for 2008 (because Susan
did not have a financial interest in the account in that year).
Slide 45
Willful versus Non-Willful in the FBAR Penalty Context
The Horowitz Case – 2019 (cont.)
It then brought case law precedent that “willful blindness” is an appropriate standard for
determining whether enhanced FBAR penalties should apply. The Court argued that the
standard was violated when the Horowitzes answered “No” to the 1040, Schedule B,
question about whether they had money in an account overseas or filed a file the FBAR to
disclose the foreign account.
The Horowitzes testified that friends in Saudi Arabia advised Peter that the FBAR was not
required because the money in the account was earned overseas. Susan testified that she
did not know about the FBAR at the time of the filing. They also argued that their U.S. tax
accountants did not ask about their overseas bank accounts, and that they did not explain
to the Horowitzes exactly what was being asked on the tax return about foreign accounts.
The Court concluded that the Horowitzes were “willfully blind” with respect to their FBAR
requirements, and therefore the IRS correctly imposed the enhanced FBAR penalty. The
Court reasoned that the fact they did not have a conversation about their accounts with
their tax preparers, despite being aware enough to ask the advice of their friends on the
matter, showed a conscious effort on their part to avoid properly learning what their
obligations were at the time, which amounts to willful blindness.
Slide 46
Willful versus Non-Willful in the FBAR Penalty Context
IRS’s Approach – Program Manager Technical Advice 2018-013
ISSUES
1. Section 5321(a)(5)(C) of Title 31 provides the maximum penalty amount for civil
willful violations of the foreign bank and financial account reporting and
recordkeeping requirements under 31 U.S.C. 5314 (FBAR requirements). What is
the standard for willfulness?
2. What is the burden of proof for establishing that a civil violation of the FBAR
requirements is willful?
CONCLUSIONS
1. The standard for willfulness under 31 U.S.C. 5321(a)(5)(C) is the civil willfulness
standard, and includes not only knowing violations of the FBAR requirements, but
willful blindness to the FBAR requirements as well as reckless violations of the
FBAR requirements.
2. The burden of proof for establishing that a civil violation of the FBAR requirements
is willful is preponderance of the evidence.
Slide 47
Willful versus Non-Willful in the FBAR Penalty Context (cont.)
Factors Weighed by IRS (IRS Internal Documents):
Factors supporting a willful FBAR penalty:
Opened the foreign bank account
Owner of, or a financial interest in, the foreign account
Tax non-compliance
Did not seek advice, or relied upon the advice of an
unqualified tax professional
Violations persist after notification of FBAR requirements
Foreign account not disclosed to return preparer
No business reason for the foreign account
No family or business connection to the foreign country
An offshore entity owns the account
Previously-filed FBARs don’t include all foreign accounts
Illegal income in the foreign account
Participated in an abusive tax avoidance scheme
Factors not supporting a willful FBAR penalty:
Inherited the foreign bank account
Only signature authority over the foreign bank
account
Tax compliance
Relied upon the advice of a tax return preparer,
a CPA, attorney, or other qualified tax
professional
Full compliance after notification of FBAR
reporting requirements
Foreign account disclosed to return preparer
Business reason for the foreign account
Family or business connection to the foreign
country
Person owns the account in his name
Slide 48
DFSP Requirements
Under the DFSP, a taxpayer is required to submit missing FBARs going back six years
and include a brief statement explaining why the FBARs were filed late (note that
reasonable cause is not required, just a statement of explanation – of course, the more
convincing the explanation the better, but there’s no specific threshold that has to be met).
In order to be eligible for the program, you need to meet the following criteria:
• the taxpayer is not required to submit missing or amended tax returns (because all
income was reported on the taxpayer’s original returns);
• the taxpayer is not under a civil examination or a criminal investigation by the IRS; and
• the taxpayer has not already been contacted by the IRS regarding their delinquent
FBARs.
Assuming the taxpayer meets the above criteria, the IRS has stated that it will not impose
a penalty for failure to file the delinquent FBARs.
(So these procedures, like the DIIRSP, are a great way to catch up with the IRS, and
avoid penalties completely.)
V. Alternative Disclosure
Approaches
Slide 50
Alternative Disclosure Approaches
While the current amnesty programs can offer beneficial results for many delinquent U.S.
taxpayers, they do not necessarily allow taxpayers completely off the hook. For instance,
under each program, taxpayers must still pay tax due with interest. Further, the Streamlined
domestic procedures bear a 5% penalty, and the new Voluntary Disclosure Program has
significant penalties as well.
These disadvantages have led some delinquent taxpayers to abandon the amnesty
programs and instead try their luck with the following alternative approaches.
(1) “Noisy” Disclosure – Under this approach, the taxpayer files past delinquent returns
with a statement explaining the reasons for the delinquency.
(2) “Quiet” Disclosure – Under this approach, the taxpayers files delinquent returns
without any statement of explanation.
Slide 51
Thank you!
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